The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

OIL exploration opponents yesterday said their demands for a drilling halt are justified by a study showing The Bahamas must match almost 60 percent of US offshore crude output to fully offset all economic risks.

Fred Smith QC, the Callenders & Co attorney and partner, told Tribune Business that the report produced for his clients, the Our Islands, Our Future coalition, exposed why the Government’s decision to give Bahamas Petroleum Company (BPC) the go-ahead was such “an astonishingly irresponsible roll of the dice”.

The study, by Sea Change Economics, said The Bahamas would likely need to produce more than 403.553m barrels of oil annually - should commercial quantities be found beneath its seabed - to match the combined annual $7.89bn contribution to national gross domestic product (GDP) by the tourism and fisheries industries.

Those two sectors are thought to be the industries most at risk from any oil-related spill, with Sea Change Economics basing its upper-end estimate on a combination of the ten-year average spot price for Brent crude ($77.20) per barrel; the lowest and highest royalty rates revealed by BPC (12.5 percent and 25 percent); and fully matching the $7.789bn annual impact of tourism and fisheries.

“Even with the highest royalty rate and highest price, in order to reach a ‘break even’ level of revenue that is equal to the value of the current economic sectors at risk from offshore oil drilling, The Bahamas would need to produce 403.553m barrels of oil annually, over half (57.83 percent) of the offshore crude oil output the US produces annually,” Sea Change concluded.

“Put another way, The Bahamas would need to produce more than 82 times the total barrels of oil spilled in the Deepwater Horizon oil spill event each year. This would mean The Bahamas would need to produce an average of 1.106m barrels per day, slightly more than the United Kingdom’s total output (939,760 barrels per day), placing The Bahamas on to the list of top 20 oil producers globally......

“Using an estimate of 12,500 barrels of oil per day as a single oil well’s maximum capacity, the above calculations (using the highest royalty rate and highest price) would mean more than 88 wells would be needed, operating at 100 percent capacity every day of the year, to meet the ‘break even’ level of oil production.”

Some observers will likely view the results of the Sea Change Economics analysis as exaggerated and overkill, especially since it uses a benchmark of matching fisheries and tourism’s contributions 100 percent. Given The Bahamas’ geographical layout as an archipelago, they will argue that it is unlikely all islands would be impacted at once by the same oil spill.

However, exploration opponents will likely counter that, much as happened with the devastation that Hurricane Dorian inflicted on Grand Bahama and Abaco, news of any oil spill or environmental damage - however minor - will immediately draw negative news coverage that inflicts reputational damage on the entire tourism and fisheries industry.

The Sea Change Economics analysis, which is understood to have been presented to the Prime Minister as part of intensifying last-minute lobbying urging the Government to reverse course on the BPC permits, also looked at scenarios where the risk levels to the tourism and fisheries industry from oil exploration fell to just 50 percent and 10 percent, respectively.

Using BPC’s two royalty rates, and the one, five, ten and 20-year average Brent crude spot price, the study noted that production of just 40.355m barrels per year - IF commercial quantities are found - would be required to offset a “10 percent” risk to the tourism and fisheries industries at the ten-year spot price.

The amount of production required this rises and falls according to the chosen “risk level”, plus the prevailing global oil price and royalty rate applied to BPC’s volumes, making precise forecasting extremely difficult as Sea Change Economics acknowledged in its assumptions.

BPC, meanwhile, totally ignored the Our Islands, Our Future Coalition’s threat of imminent legal action - including a bid for an injunction to halt its Bahamian exploration activities that could be made as early as this week - in its Friday update to investors and the global market.

The oil explorer revealed that it has increased the cost estimates for its Perseverance One well, which will be drilled some 90 miles west of Andros close to The Bahamas’ maritime boundary with Cuba, by some 15 percent to account for enhanced COVID-19 mitigation measures that will be imposed on the crew of the Stena IceMAX drill ship.

With no mention of a possible increase in legal costs, BPC said the likely costs associated with Perseverance One will now be in the $24m to $28m range as opposed to the previous $21m to $25m estimate. The company is also expanding its contingency funding from $5m to $7m.

“This includes heightened isolation and testing measures for all crew and personnel, extended mandatory quarantine in secure hotel facilities, and private charter flights,” BPC told the markets.

Simon Potter, its chief executive, added in a statement: “Given the ever-evolving and escalating COVID-19 situation around the world, the sobering reality is that preventing the COVID-19 virus spreading onto the Perseverance No.1 drilling installation in the first place is dramatically more cost effective than having to deal with it once it has arrived offshore.

“Hence the considerable efforts put in by BPC, Stena and participating contractors and service companies to develop even more stringent measures to detect and diminish the risk of infection, which are now being implemented, but which will come at a cost.”

He added: “Fortunately, given the flexible range of funding options the company has developed over the course of the last two years, we have successfully agreed an increase to the size of our conditional convertible note facility by £4.75m to offset this increased cost.

“Moreover, we are pleased that the providers of this facility have demonstrated their commitment to the project by agreeing to provide a portion of this facility unconditionally once the well is spud, and the balance expected to be available as required. In aggregate, these arrangements provide enhanced financial capacity, notwithstanding a worsening COVID-19 environment.

“We are aiming to assess what hydrocarbon resource potential lies within the territorial waters of The Bahamas for the mutual benefit of the nation and people of The Bahamas, the shareholders of BPC, and all other stakeholders,” Mr Potter continued.

“Safe, responsible, and uninterrupted operation is our key objective in the ever changing global COVID-19 environment, and these additional costs and increased funding arrangements reflect a prudent approach to achieving this objective.”

BPC has previously said its activities could generate up to $5bn in royalty revenues for The Bahamas over the ten to 20-year lifetime of the project if commercial oil reserves are located. The company has also asserted that the Perseverance One well is being drilled in an area where it estimates there is a “prospective oil resource of 0.77bn barrels, with an upside of 1.44bn barrels”.

However, this has not convinced Mr Smith, who yesterday argued that The Bahamas could be exposed and liable to compensation claims by Florida and Cuba should any oil spill result from BPC’s activities - the possibility of which, the company says, is virtually negligible due to its work over the past 14 years.

“I don’t know why the Government of The Bahamas, both FNM and PLP, have to gamble with our future by engaging with a speculator,” Mr Smith said. “This is an astonishingly irresponsible roll of the dice by the Government, and I call upon the Prime Minister and minister of the environment to stop this experiment, this uncontrolled experiment, on our environment. The risk is just too great for the paucity of the return.”